Equity, Diversity and Inclusion

Financial empowerment has never been more important — here's what institutions can do

Financial empowerment is becoming increasingly important in the fast-moving world of personal finance.

Financial empowerment is becoming increasingly important in the fast-moving world of personal finance. Image: REUTERS/Borja Suarez

Akash Shah
Chief Growth Officer, BNY Mellon
Lisa Rumore
Managing Director, Corporate Strategy, BNY Mellon
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Sustainable Finance and Investment

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  • Financial empowerment is the combination of knowledge, skills and behaviours a person needs to manage financial resources confidently.
  • Democratisation of capital markets calls for a renewed look at the most effective approaches to financially empower a larger share of the global population.
  • Financial institutions can play a key role by finding new ways to encourage investor participation and reach population segments that would benefit the most from financial education.

April was National Financial Capability Month in the United States and numerous other countries specify a month to recognise the importance of making informed decisions about money.

The prominence of financial empowerment in the agendas of world governments serves as a reminder of its ever-growing importance: as the financial world becomes increasingly fast-paced and complex, and more people have direct access to savings and investment tools, the need to help households make sound investment decisions is greater than ever.

The World Economic Forum’s Future of Capital Markets research and the Democratization of Retail Investing Survey highlight the importance of financial empowerment as a key enabler to increase participation in capital markets and suggests that financial institutions, as the most trusted source of financial advice, can play a leading role in helping to broaden financial knowledge.

Rethinking financial education

Education is the key to starting people down the path toward financial confidence and an opportunity to build wealth. The Democratization of Retail Investing Survey shows that early exposure to financial education is linked to higher participation in capital markets.

Financial education helps people make more informed decisions on money management, increases awareness of borrowing and repayment of debt and helps avoid predatory lenders and scams. But the traditional ways of teaching people how to make more informed financial decisions, such as classroom learning, may not be the most effective approach to engaging a broad and diverse audience and ensuring the delivery of relevant financial information.

Financial empowerment starts with education — but trust and access are both critical, too.
Financial empowerment starts with education — but trust and access are both critical, too. Image: BNY Mellon

Studies have shown that contextual learning — where relevant financial education is provided at the very time when a financial decision is made — can be an effective strategy, especially to reach adults and users not accustomed to traditional learning. Opportunities exist to embed financial education into all aspects of an individual’s life where financial decisions are made, including places of employment, retailers or healthcare providers.

When lecture-style classes are delivered, specificity and personalisation have been shown to maximise relevance and engagement, while standardised messages built for an “average” user may disengage underserved segments. For example, people earning a lower income may be more focused on their short-term financial objectives while those with higher incomes could be zeroing in on longer-term investing goals.

A contextual and personalised approach to financial education can positively affect the three key enablers to participation identified by the World Economic Forum 2022 Insight Report.

Access: It is important for people to see themselves as candidates to receive financial advice, that their goals matter and there exists a range of products that align with their objectives and risk tolerances.

Education: Well rounded and action-oriented messaging about financial principles, strategies and product options should be tailored to specific audiences and clearly speak to their unique challenges.

Trust: Beginning investors need to understand entry-level investment language, market fluctuations and how risk and reward relates to their personal scenario to build faith in financial institutions and markets.


Financial institutions and financial empowerment

Our survey shows that retail investors continue to trust traditional financial institutions over other players when it comes to their monetary decisions. Here’s what organizations can do to maximise the social benefit of that trust:

Design more inclusive products.

There can be a disconnect between the financial needs of low-income consumers and the types of financial products available to them. Also, cost may thwart access to products that can aid in long-term wealth building. By listening and gaining a better understanding of the needs of their communities, companies can design products relevant to a broader set of potential clients.

Align with regulation.

Government action can encourage more people to save and engage in the capital markets. For example, the SECURE Act (Setting Every Community Up for Retirement) recently enacted in the United States aims to stimulate long-term investing by allowing for greater contributions to retirement plans and increasing opportunities for employee participation.

Leverage technology and expertise.

A combination of financial technology and the human touch can guide new investors towards the right financial education, tools and resources resulting in personalised financial advice for segments that would not traditionally receive it.

Join with community organizations.

Consider working with schools, nonprofit organizations and community centers to provide in-person or virtual financial education and support. Offer financial education programmes to help individuals understand the basics of budgeting, saving and managing debt.

Lead with transparency.

The key to building trust and fostering financial inclusion is to provide clear and accessible information on products and services and help ensure that fees, interest rates and any inherent risks are presented in plain, easy-to-digest language.

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A stronger, more inclusive financial world

Financial education is an endeavor that brings multifaceted benefits. As more people gain access to financial services, participation in the economy and social mobility increase and systemic instability declines.

An industrywide commitment to promote financial education will build trust, help more people make smart financial decisions, strengthen markets and reduce inequities around the world.

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The views expressed in this article are those of the author alone and not the World Economic Forum.

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Equity, Diversity and InclusionFinancial and Monetary SystemsForum Institutional
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